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Are Service Providers Giving Up on Landline too Soon?

Jon Arnold, professional telecoms analyst and fan of M5, is always a great source for fresh perspectives on the state of our industry (check out his blog here). Arnold recently published a post on the role-switching going on between companies involved in landline services and wireless services. Basically, traditional landline companies such as AT&T and Verizon seem to have shifted their focus towards wireless, leaving the door open for cable companies (often offering consumers attractive phone, TV, and internet bundles) to gain valuable landline market share.

If you're interested in seeing a bit of the big picture here I'd definitely recommend checking out the piece. I've posted a few of my favorite excerpts below, or follow the link to read the full article.

Are Service Providers Giving Up on Landline too Soon?

Interesting times in the carrier space, for sure. While most readers of this column are focused on the business market, it’s hard to ignore what’s occurring in the consumer space right now. Being based in Toronto, I happen to be struck by the similar trends shaping on both sides of the border. Over the past few days, we’ve seen earnings reports from major telcos and cablecos, and these businesses seem to be going in opposite directions.

In the U.S., for example, Verizon and AT&T are telling similar stories. Wireline losses continue to mount, and wireless is driving most of the growth. Heavy investments in fiber to capture video and power Internet users are necessary, but will take some time yet to become major bottom line producers. Verizon, in fact, lost $198 million in Q2 – this time last year, they made $1.48 billion. Not surprisingly, to stem the tide, layoffs continue. Their job rolls are about 25,000 employees lighter from last year, and they anticipate another 11,000 will take early buyout offers. Wireless growth aside, the story is similar for Canada’s major telcos, but the losses aren’t quite as steep.

Cable, on the other hand, is booming. IPTV rollouts from the telcos aren’t hurting them as much as they’re hurting the telcos by winning away landline phone subscribers.

In essence, the traditional telcos are evolving into mobile operators, whereas the cablecos are building a pretty strong hold around the home environment. It all lines up rather neatly, actually. The triple/quad play bundles are clearly a winning strategy, and the convenience makes sense for the consumer. All the home services are rolled into one package – TV, Internet and home phone. The cablecos have managed to do this very well, whereas only a fraction of telco subscribers can say the same. When you think about the technical challenges behind these services, the outcome really isn’t surprising – it’s much easier for cablecos to add telephony than it is for telcos to add IPTV. Let’s not forget long distance – well, actually you’d better. This used to be a cornerstone of telco profits, but no more. Sure, there is some money to be made with international calling, but domestic long distance is now an oxymoron, as everyone pretty much offers it for free.

So, where does this leave carriers? They really are in a precarious spot, at least in the U.S. On the defensive side of the ledger, they seem to be conceding the landline business outright. The trend is only going in one direction, and they’re been taken down by three forces. First, they’re losing subscribers to cablecos – this is the toughest loss of all. By definition, incumbents will be the last players to offer VoIP, simply to avoid cannibalizing their core subscriber base. So, while they stayed on the sidelines, the cablecos simply walked in and took the business away. OTT operators like Vonage got the ball rolling, but it’s the cable operator’s world now, and the OTT’s just live in it. Bottom line – the cablecos did a great job figuring out how to offer VoIP. In the early days, there was a question of trust as to whether consumers would take them seriously as telecom providers. Nobody feels that way today.

There are two other factors to consider in the demise of telcos. The second is wireless substitution, which will continue to drive landline losses. However, at least here the telcos have a fighting chance of keeping their subscribers. Finally, there is the white flag scenario, where incumbents are simply exiting the landline business. Divestitures such as Verizon selling off wireline operations to Frontier Communications illustrate how this trend is unfolding.

Now, it looks like the telcos have all their eggs in one basket. Wireless has been their savior, and the growth story simply gets better when you layer on mobile broadband, and game-changers like the iPhone, iPad and Android. Subscriber growth remains healthy, the smartphone market is far from saturated, margins are good, and demand exceeds supply. Countering this, of course, is the endless catch-up that operators need to do in terms of expanding network capacity and transitioning to the all data worlds of 3G and 4G.

As a result, the world of telcos is much different now than ten years ago. The diverse base of services and revenues is gone, and the competitive landscape is far more challenging. Wireless is a great business, but I would argue that telcos have shifted from a position of strength to weakness. By conceding wireline to cablecos they have lost the foundation of their traditional relationship with millions of households, and it’s hard to see how they can win this back.